Capitalism is dead, credit new king, says Duncan

ChrisOliver

HONG KONG (MarketWatch) — The world needs to clue in to changes to its economic system, including the death of capitalism, according to noted financial author Richard Duncan, who warns that attempts to turn back the clock on our credit-driven economies could be cataclysmic

What’s evolved is a new global economic paradigm that no longer follows the old script and won’t respond favorably to fiscal austerity, says Duncan, who believes the global economy has remained on the brink since the global crisis.

“I think this represents a new economic system,” Duncan told Marketwatch in a telephone interview from his office in Bangkok. “The biggest impediment the world faces in overcoming this crisis is the broadly held misconception that we are operating in a capitalist system.”

Economist and author Richard Duncan

Recognizing that the world operates on a different set of rules from the laissez-faire capitalism of the 19th century is among the key arguments in Duncan’s 2012 book, “The New Depression: The Breakdown of the Paper Money Economy.”

While it might seem like an arcane economic question, Duncan said that, in fact, the stakes are huge.

Global policy makers are running out of time to take advantage of opportunities offered up by the new system to help resolve the crisis, or otherwise face sliding into a corrosive period of economic contraction and rising geopolitical tensions, he said.

“The danger is that this new economic paradigm will collapse through debt deflation,” Duncan said.

Stuck with ‘creditism’

Duncan sees the global economy as having undergone a fundamental transformation during the past 43 years. Since changes in 1968 that freed the Federal Reserve from holding physical gold in reserve against dollars in circulation, total global credit has expanded 50 times, or from about $1 trillion to $50 trillion in 2007.

Over that period, credit creation and consumption, or what Duncan calls “creditism,” took hold as the growth dynamic behind the global economy, displacing capitalism, which he says relied upon sound money, hard work and capital accumulation.

Attempts to break the global economy’s reliance on credit creation as a driver and reboot back to earlier ways won’t work, said Duncan, who sees “sound money” policy recommendations as a recipe for disaster.

Underscoring the system’s dependence upon credit is the fact that there were only nine occasions in the past five decades when total system credit in the U.S. grew less than 2% annually.

However, each one of the slower credit-growth years was accompanied by a recession that ultimately was brought to an end by another round of massive credit creation, Duncan said.

Duncan believes that true capitalism died in 1914, when nations across Europe abandoned gold-backed currencies, running up huge deficits in preparation for what would come to be known as the Great War.

More recently, changes wrought by the global credit explosion can be seen in the behavior of U.S. Treasury debt, where rates at which the Federal government borrows have remained low, even as the national debt has doubled in just a few years.

Duncan said that governments can now prop up their economies through government spending longer than would have been thought possible a few years ago, owing to the new dynamic.

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“I’m recommending making use of this new economic system. Borrow money at the government level at very low interest rates and then invest that money and change our world for the better.” Duncan said.

Duncan said some of his ideas were inspired by the U.S. economist Irving Fisher, whose 1912 writings helped identify the role of money supply in determining prices and economic activity.

It’s important to realize that “money essentially became credit” when the dollar lost its gold backing, heralding a new era where increased government spending doesn’t necessarily push up interest rates, Duncan said, adding that he reworked Fisher’s theories in a chapter entitled, “Quantity Theory of Credit”.

Globalization getting tired

What lies ahead is a much more difficult period for the global economy, Duncan believe, in which coming changes will debunk commonly held notions about growth in emerging markets.

In particular, the view that China will soon become the world’s biggest economy is likely to fade away, just as optimistic attitudes towards Japan did after its asset bubbled popped in the late 1980s, ending a long period of rapid growth that had lifted the Japanese economy into the global No. 2 spot.

“When I moved to Hong Kong in 1986, it seemed almost everyone believed that Japan’s rapidly growing economy would soon become the largest in the world,” Duncan said.

“That didn’t happen. Japan’s economy was a bubble, and today it’s no bigger than it was in 1993 if you don’t adjust for deflation,” he said.

Now it’s China that’s at risk as its trade surpluses with the U.S. “flatten out,” heralding the end of its rapid credit growth, Duncan said.

Glutted with excess industrial capacity and a banking system laden with massive loans that will never be paid back, China faces difficult decisions much as Japan did, according to Duncan.

China’s federal debt, believed to be around 70% of gross domestic product, will be ramped up to 100%-200% of GDP in the next five to seven years in order to achieve annual 3% growth, he said.

The forecast represents the “best-case scenario” in Duncan’s view, and a more dire outcome is possible, since China — unlike Japan — won’t have support in the form of a booming global economy to absorb its exports.

As it enters the twilight of its boom, China has reached the limits of its consuming.

“This is the peak,” Duncan said in reference to China’s appetite for everything from iron ore to luxury consumer goods.

No libertarian is he

While Duncan’s talk of sound gold-backed money and overreliance on credit sounds close to standard libertarian and Austrian school arguments, his policy recommendations are downright Keynesian.

In suggestion a future course for the U.S., Duncan warns against repeating Japan’s mistake of squandering stimulus money on useless make-work projects and instead invest in sectors that would give an edge in future technologies that could be commercialized to help bring global trade back into balance.

Building a national solar-energy grid that could tap the arid landscapes of Nevada are among Duncan’s recommendations.

Duncan said he first outlined his thinking on government-led investment in a 2008 book. On speaking tours, he encountered the “greatest push-back” from free-market, libertarian thinkers who are skeptical of government involvement in the economy.

He says many libertarians “are with me along through the argument” on causes of the global crisis, but that they tend to be “very surprised” by his conclusion that part of the solution requires governments to spend more — not less.

Duncan says he tried to counter those views by bringing up previous examples of successful government initiatives, ranging from victory in World War II to the invention of the Internet.

“I’d like to offset the toxic effect cable news television has had on the way the economy works and what needs to be done to fix this crisis,” Duncan said.

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